On policy rates, it called upon RBI to factor in higher than expected May and June CPI inflation and the impact of partial implementation of the Seventh Pay Commission award.PTI | August 05, 2016, 16:30 IST

NEW DELHI: Indian economy is expected to clock a growth of 7.4 per cent this fiscal, and on the policy front, the Reserve Bank is likely to leave key rates unchanged at its August meet, says a UBS report.

According to the Swiss financial services major, slowdown in real GDP growth in 2016-17 is likely and it expects growth of around 7.4 per cent in 2016-17 after the 7.6 per cent recorded in 2015-16.

"The disinflationary effect of balancesheet repair is depressing economic activity towards a more sustainable path while external pressures are likely to depress the economy. On a more positive note, healthier balancesheets should set the stage for a growth recovery in 2017-18," it added.

On policy rates, it called upon RBI to factor in higher than expected May and June CPI inflation and the impact of partial implementation of the Seventh Pay Commission award.

Accordingly, UBS expects RBI's inflation projection to be revised higher in the August policy statement. The policy meet is due on August 9.

UBS expects the 2017-18 CPI forecast at 4.5 per cent, from the previously estimated 4.2 per cent.

"We expect Rajan to leave policy rates unchanged on August 9, in line with the consensus," UBS said in a research note, adding that "we expect one further 25-bps policy rate cut by the end of calendar year 2016".

The report noted that the next RBI Governor will not "radically" shift policy in the near term and "over time, we suspect policy will be somewhat looser than it might otherwise have been under Rajan".

In the June policy review meet, RBI Governor Raghuram Rajan kept rates unchanged, citing rising inflationary pressure, but hinted at a reduction later this year if good monsoon helps cool inflation.

The industry is still hopeful of further rate reduction from the apex bank to boost investment.